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Consumers surplus
(BCS)
Supply S(Q)
Equilibrium point
PE
Demand D(Q)
Producers
quasi-rent
(BPQR)
QE
B = D(Q)dQ S (Q)dQ
0
Resource
Quantity (Q)
QE
Consumers surplus:
BCS =
D(Q)dQ PE
0
QE
S (Q)dQ
0
Consumers surplus is the extra amount consumer would have paid for QE units if they were
purchased in infinitesimally small increments from 0 to QE, rather than in a single batch of QE. It
represents the portion of net benefit accruing to the consumer.
Producers quasi-rent is extra amount producer obtains by selling QE,units in a single batch
rather than in infinitesimally small increments from 0 to QE. It represents the portion of net
benefit accruing to the producer.
In the absence of constraints the quantity and price of the resource should converge to the
equilibrium values, since there is always an incentive (for both consumer and producer) to move
from non-equilibrium to equilibrium values.
Sometimes imposed limits on prices or quantities prevent movement to equilibrium:
Resource
Price/cost (P)
S(Q)
Imposed price PH
above equilibrium
PE
Imposed price PL
below equilibrium
D(Q)
Resource
Quantity (Q)
Imposed prices above equilibrium create surpluses since consumers are not willing to buy all
that producers want to supply at high price..
Imposed prices below equilibrium create shortages since producers are not willing to supply
all that consumers want to buy at low price.
If problem inputs are changed supply and demand curves can shift, changing equilibrium
quantity/price.
For a problem where pumped water is used to irrigate crops lower supply costs and/or higher
crop prices can shift equilibrium towards higher production.
Resource
Price/cost
(P)
Nominal supply
costs
Lower supply
costs
D(Q)
Higher crop
prices
S(Q)
Nominal
crop prices
Resource
Quantity
(Q)
Supply and demand curves for this problem can be derived by considering the consumption and
production of water in two related sub-problems.
Supply sub-problem: Identify well pumping rates that minimize pumping cost, subject
to constraint that specifies minimum water pumped. Provides a derived supply curve.
Demand sub-problem: Allocate crops to maximize crop revenue, subject to constraint
that specifies maximum available irrigation water. Provides a derived demand curve.
Illustrate this with an example with 3 crops and 5 wells that withdraw water from a confined
aquifer below the farming area..
Derived Supply
The supply problem minimizes the sum of the pumping costs L j p j at the 5 wells:
Lj = pumping lift (m) at well j ; j =1,,5
3
Pumping lift depends on drawdown, which is related to pumping rate are related by a response
matrix Rjk derived from a groundwater model.
Total pumping from all 5 wells must provide a specified quantity of water Q (m3/season).
Minimize L j p j
p1 ,... p5
such that :
R jk p k = s j
L j = [hg - h0 j ] + s j
5
pj Q
Response matrix
Lift-drawdown
Supply requirement
j =1
pj 0
Non-negativity
Study area is a hypothetical 9 km. by 9 km. (8100 ha) farming region which is discretized, for
simulation purposes, with a square grid of 9 by 9 cells, each 100 ha. in area:
35
43
60
9000 m.
66
47
The cells are numbered starting in the lower left corner of the grid, increasing upward to
the upper left corner, continuing from bottom to top in each column, moving from left to right.
Well
35
43
47
60
66
H0i (m) 6.77 9.01 13.95 13.01 16.68
The response matrix for this problem, which is listed in the table below, is composed of the
following partial derivatives, where sj is drawdown at Well j and pk is pumpage at Well k:
s j
R jk =
j = 35,43,47,6 0,66; k = 35,43,47,6 0,66
p k
Response Well
These are obtained from a finite difference groundwater model, as described in Lecture 11 .
35
43
47
60
66
66
.031
.041
.094
.054
.202
The derived supply S(Q) for this problem is obtained by plotting the shadow price for the
supply constraint vs. this constraints right-hand side value Q (a separate GAMS solution is
required for each value of Q). The shadow price is the increase in pumping cost required to
generate an additional unit of water. This price increases linearly since the relationship between
quantity pumped and lift is linear.
$ revenue/m3 pumped
0.04
D(Q)
0.03
S(Q)
0.02
0.01
0
8
4
1000 m pumped/season x 10
Derived Demand
In this example the demand for water is generated by crop production. Crop revenue is
maximized by allocating land to crops to make best use of available land and water. This is an
extension of the crop allocation problem of Lecture 7:
such that :
10 4 A1 j x j Q
A2 j x j 8100
xj 0
Water constraint
Land constraint
Non-negativity
Crop yield yj(x) often decreases as more land is developed since the best land is typically used
first.
y j ( x j ) = y1 j y 2 j x 2j (kg/ha)
Coupled Problem
The equilibrium point (but not the supply and demand curves) for this example can be obtained
by solving a coupled problem that combines the supply and demand subproblems. In this case
the objective is to maximize net benefit (crop revenue pumping cost):
Maximize
x1 ,...x3 , p1 ,..., p5
c j y j ( x j ) x j L j p j
such that :
4
10 A1 j x j =
pj
j =1
A2 j x j 8100
R jk p k = s j
L j = [h g - h0 j ] + s j
pj 0
xj 0